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Economy not out of trouble yet

NetScribes/R Radhakrishnan

The Indian economy's report card for the first half of 2000-01 looks impressive. A 22 per cent rise in exports as against 12 per cent for the corresponding period last year. A trade deficit of $4.67 billion, which is a 7 per cent drop from H1 2000. So, is the economy turning the corner? Not really, if you ask economists and analysts.

The current year's growth rate looks impressive for two reasons: The lower base levels last year and the depreciation of the rupee against the dollar. "Also, the export growth to $21.3 billion is primarily due to increased gems and jewellery exports," says Sanjeet Singh, a senior analyst at ICICI Securities.

"The current growth in exports cannot be sustained in the second half, given the decline in manufacturing activity locally and the slowdown in the US market. At best, the annual exports growth would stand at 15 per cent (against the government's 18 per cent target)," he adds. The growth rate of the US economy dropped to 2.7 per cent in September 2000 from 5.6 per cent in the year-ago period.

Analysts are also less enthused by the trade deficit numbers. The decline, they say, has been driven by a fall in non-oil imports.

Non-oil imports are a barometer of industrial activity in the country and a drop in this indicator reflects a slowdown in manufacturing activity. The index of industrial production stood lower at 5.3 per cent during April-September 2000, compared to 6.2 per cent in the year-ago period

The decline in non-oil imports, which has been gathering pace since the second quarter, continues to be a major cause for concern. Non-oil imports totalled $17.68 billion during the first half of this year, 2 per cent lower than the corresponding period in 1999-2000. On a year-on-year basis, non-oil imports dropped 7 per cent in the month of July, 11 per cent in August and 21 per cent in September.

So what happens to the fiscal deficit? At the end of the first six months, the fiscal deficit was 19 per cent lower at Rs 426 billion from Rs 524 billion. However, it would be rather simplistic to conclude that the fiscal deficit scene is under control.

"The buoyancy is mainly due to higher direct tax collections. The collections from indirect taxes, particularly excise duties, continue to be slack. The cut in excise duty on oil products will lead to a shortfall of Rs 80 billion. Customs duty collection will remain at budgeted levels due to the depreciating rupee. The government has no leeway on non-plan expenditure, particularly the interest payment due in the second half," says Singh.

Direct tax collections remained buoyant despite industrial slowdown. Reason: Higher advance tax payments based on the optimism that prevailed at the beginning of the year.

Secondly, restructuring of corporates and cost-cutting also helped industry improve profits without proportionate rise in volumes. The second half could be a different story. "I will be surprised if the government manages to keep the fiscal deficit at the targeted level of 5.1 per cent," says Singh.

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